Vodafone tidies up with $11 bln SFR sale to Vivendi

Vodafone (VOD.L) emerged on top after it finally sold its stake in France's SFR to Vivendi (VIV.PA) which, like other recent buyers, paid a full price to secure control in a major realignment of the telecoms sector.

The long-awaited 7.95 billion euros ($11.31 billion) deal came just two weeks after Deutsche Telekom AG (DTEGn.DE) agreed to sell out of the U.S. for $39 billion and after Vodafone itself agreed to buy out its Indian partner for a hefty price.

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Analysts said the price Vivendi paid for SFR was at the higher end of expectations.

This recent activity reflects a move by telecom firms to divest minority assets they do not control, concentrate on their core markets and return more money to shareholders who are aware of the low growth prospects in mature countries.

Vodafone, Deutsche Telekom both pledged multi-billion euro share buybacks after their deals, while Vivendi also signalled that the SFR buyout would lead to an increase in its dividend.

The deals also reflect the fact there are fewer acquisition targets in high-growth emerging markets, leading Europe's telecom giants to turn their focus to more mundane matters such as managing their home markets and improving balance sheets.

Consultants PRTM said such deals showed telecom firms were now more interested in national depth than global reach.

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Robin Bienenstock, analyst at Sanford Bernstein, said Vodafone and Deutsche Telekom's deals both reflected a desire to exit countries where they were weak or in a non-controlling position to focus on markets where they were stronger.

"You're going to see a massive portfolio cleanup among telecom operators because they need capital to reinvest in their core networks," she explained. "The only way to do that is to jettison the weak stuff and plough money into the markets where you are stronger-- this is a scale game."

For Vodafone, the deal marks the latest and largest move in its strategy to sell minority stakes it does not control to increase cash flow and, to a degree, retrench after a decade-long international expansion.

For Vivendi, the deal brings closer its vision of a new-look group with higher cash flows, more exposure to telecoms and its mature home market of France. [ID:nLDE70I0XN]

However analysts said Vivendi had paid a full price for the 44 percent stake -- 7.75 billion euros plus 200 million euros to reflect the generation of cash between January and July 2011.

Shares in Vodafone rose over 2 percent in early trading before settling to be up 1 percent, while Vivendi fluctuated, falling 1 percent before recovering to be up 1 percent.

"For Vivendi, the price is too high," Bienenstock said.

"Telecom stocks in mature markets trade for about 5.1 times to 5.3 times EV/EBITDA, but the French market is less healthy than most European markets and the rights attached to the stake do not justify raising the valuation by almost 20 percent."

In slides posted on Vivendi's website, the company predicted that the deal would boost its 2011 adjusted net income by 15-18 percent. It also said the deal would add at least 600 million euros to its adjusted net income in 2012 and 2013, with some 350 million euros on a recurrent basis.

Vivendi also reassured investors that the deal would be financed without a share issuance and said it expected its credit rating of 'BBB' to remain unchanged.

Analysts are predicting the deal to be 15-20 percent accretive to Vivendi in the coming years.

Some also expect the deal to help Vivendi's stock by reducing the conglomerate discount long put on the shares of anywhere up to 20 percent due to the fact the parent company did not have access to all the cash flows of its various divisions.

UBS analyst Polo Tang also questioned whether Vivendi was buying at the wrong time as the French market becomes more competitive and tariffs look set to fall further when Internet service provider Iliad (ILD.PA) launches as the fourth mobile operator next year.

"Initially, the market may react positively to the SFR buyout," he said. "However, we think Vivendi has potentially paid a premium multiple to almost double its exposure to an asset seeing intensifying competition."

In comparison, the deal caps a good few days for Vodafone, after it announced last week a deal to buy out its Indian partner Essar, with which it often had a fractious relationship.

Responding to investor pressure to clean up its portfolio, Vodafone has already sold its minority stake in China Mobile, sold interests in Japanese carrier SoftBank (9984.T) and begun a sale process of the nearly 25 percent it owns of Poland's Polkomtel. [ID:nLDE67G18L] [ID:nLDE69I0QM]

In the U.S., it is also nearing a deal to resolve a long-standing issue with joint venture partner Verizon (VZ.N) where it has not received a dividend for several years.

Thomas Singlehurst, analyst at Citigroup, said neither company had really gained the upper hand over SFR but said for sentiment, Vodafone probably emerged the stronger.